Very strong balance sheet, badly beaten down industry with which they are the market share leader. The majority of their costs are attributed to the price of milk which is very high right now, this has all been priced into the stock (as has the loss of their biggest supplier--Walmart). The cost of milk seems to have peaked, agricultural economists are calling for an increase in milk prices for Q1 but then a steady decline afterwards. Competition to produce milk has picked up as Europe and Australia have increased their production which will drive prices of milk down and that will drive profits of DF much higher.

Dean Foods is the largest player in a terminally declining business, fluid milk and dairy products. Despite their breadth, they cannot gain control of many key markets nationwide, because milk is an inherently local business. High freight costs per cubic foot sales coupled with low barriers to entry, create an endless stream of smaller competitors. Dean is inhibited on the growth front because it has sold off profitable, trendy divisions like plant-beverage based White Wave, Dean Foods has nothing left but a commodity business that will not reward the supplier with sufficient demand to prosper going forward.

The company behind the Horizon Milk products - It is by far the best organic milk available in supermarkets and we buy a gallon of it a week. Also purchase the horizon organic vanilla milk for the kids lunches - Both products are top shelf. While these are just a couple of the companies many products, it shows the company's smart acquisitions of quality/popular organic suppliers.

The company's got a range of regional brands of staple products that may, with some diligence on the part of management, expand to national brands. It's a difficult and long term task, given how connected people are to their lifelong attachment to dairy product brands, but Dean Foods is well positioned to make it happen.

Dean Foods is the largest packager/distributor of milk products in the United States. They also lead the market in coffee creamers with their flagship brand “International Delight”. Besides “Dean” milk, here are some other brands of theirs you may have heard of: “Silk”, “Horizon”, “Land-O-Lakes”, “Alpro”.

Over the past 3 years, dairy companies have been one the hardest hit sub-sectors of the agricultural industry. They’ve been wounded by low milk prices pending the food & commodity bubble of 2008 and the subsequent panics that spurred investor exoduses throughout the recession as well as the recovery.

Only until recently (December 2010), milk prices noticeably twitched upward for the first time after 3 years of decline. Supply is down, this may be a sure signal of the dairy sub-sector reacting to prolonged deflation.

Isn’t it strange that Dean’s revenue remains unchanged over these past 3 years despite declines in demand and pricing for milk (which accounts for more than half of their revenue)? The reason for this is because Dean has quantifiably increased sales via the expansion of their recently acquired brands like the organic milk “Horizon” and via variant introductions (i.e. flavors) for existing brands like “Silk”. Revenues have increased despite sub-par milk prices and overall lack of market equity in the dairy sector. This is a planned movement by Dean called “Whitewave-Alpro” and it is being executed successfully along with a $300 million cost-cutting program. Dean has positive earnings estimates 2011 and 2012 (*see Fool growth rates).

Sector analysis: if you read the news, you’ll notice the rate of milk production is declining (a reaction to a prolonged demand dive and negative speculation), a pharmaceutical company released a drug to combat allergies nearly 3% of children have with milk, parents are just starting to complain about increasing milk prices, the FDA and various foreign agencies blocking out supply from Japan, Goldman Sachs’ retaining of a neutral rating for DF (which means they’re probably buying shares right now).

All these are signs of impending demand during a long, strong period of negative speculation.

The only question I have is why two top executives (incl. their COO) resigned this past quarter. If you have an answer or conjecture, I’d like to know it!